Cerillion (CER:AIM)   £15.78

Market cap: £565 million

Not every investor will back young (ish) technology-led growth companies because it often means being willing to steal yourself through years of painful losses at the start of the journey. It’s why so many feel the need to look overseas for sustainable tech growth, with real profits and cash flows.

But while built-in-Britain opportunities in the space may be rare, they do exist, and Shares believes that Cerillion (CER:AIM) is one of them. If you’ve not come across the company before, in short, it scores very highly on core quality growth metric like returns on capital, equity and operating margins, throws off oodles of cash and appears to have years of growth runway before it.

Data suggests a global opportunity in this space worth $70 billion by 2027, so while it doesn’t operate across that entire scope (it doesn’t work in China, for example) it’s still an enormous opportunity, with potential to scale out vertically into other utility industries, like water, and electricity, for example.

WHAT THE BACKGROUND?

It floated in 2016 on the junior AIM market, which may be one reason why you might have missed its progress, but has been around for nearly three decades, having been spun-out via a management buyout from Logica in 1999, and it is still led by Louis Hall, chief executive, and the main driver of that spin-out.

Cerillion built its reputation on an integrated enterprise billings and customer relationship management software platform sold to telecoms companies, particularly tier two and three operators. But it has expanded the suite over the years to cover charging, interconnect, mediation, and provisioning solutions.

The company names clients including KDDI (9433:TYO), listed in Japan, India’s Airtel, and Manx Telecom, the Isle of Man operator that used to be listed on the London market until its 2019 private equity buyout. More familiar names like Three, Virgin Media and Cable & Wireless are also on the list.

ATTRACTIVE OFF-THE-SHELF SOLUTIONS

Crucially, Cerillion’s suite offers the industry the kind of flexible, off-the-shelf solutions needed to monetise vast capital investment in new 5G mobile (6G is coming) and fibre networks in a savagely competitive market environment.

Increasingly selling five-year software-as-a-service contracts, Cerillion’s investment in its IT suite and headcount (US in particular) means it has more tools in its stack to sell to clients, so average contract sizes have been rising. This is evidenced by November 2023’s first tier one client, an unnamed European telco, worth €12.4 million over the full term of the contract, and an $11.1 million deal with a South African operator, announced in May 2024.

This helps explain a consistently growing new sales pipeline that hit a record £254 million in the first half of fiscal 2024 (to end of September). Annual recurring revenues account for about two-thirds of the firm’s £22.5 million sales, particularly sticky given the value proposition, switching difficulty and costs.

IMPROVING QUALITY

Operating margins continue to expand to 43.4% in the first half, showing that Cerillion is keeping a firm grip on running costs. It threw off £4.7 million of free cash leaving the company debt free with £26.6 million net cash on the books.

It pays modest dividends, the full year yield is about 0.8%, but investors would be buying for growth, not income. And overall, shareholder returns have shone. In three years returns on capital and equity have grown from 29.7% to 37.3% and 35.5% to 40.7% on equity.

In five years, the stock has soared 928%, and 2,005% since IPO, and now trades on rolling 12-months PE (price to earnings) multiple of about 30, according to Stockopedia data. But we believe long-run growth stories like Cerillion need to be judged over several years, not just the next year.

Using forecasts out to full year 2026 supplied by Berenberg and Liberum implies an average PE of near 25 over that period. And both brokers suggest upside risk to their estimates. One final point, Cerillion could be targeted by private equity firms. Hall owns just over 30% of the shares, so any offer would have to be compelling and at a sharp premium to current valuations.

But as we have seen in recent years, private equity buyers have cash to splash and are keen over UK quality assets possibly trading at discounts to overseas peers. So, no takeover slam dunk, but it’s another factor to build into your investment decision.

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